How awful was rice pledging, really?

How awful was rice pledging, really?

Experts and involved parties give their perspectives on the divisive scheme, with opinions ranging from scathing to almost conciliatory.

Farmers are hastening to plant rice amid fears of scarce rainfall in Sakon Nakhon. PRATUAN KAJORNWUTTINUN
Farmers are hastening to plant rice amid fears of scarce rainfall in Sakon Nakhon. PRATUAN KAJORNWUTTINUN

The verdict from the Supreme Court is out today on whether former prime minister Yingluck Shinawatra is guilty for her handling of the contentious rice-pledging scheme, one that officials say cost taxpayers more than 500 billion baht.

Some casual observers and her supporters argue that her actions to alleviate farmers' plight was neither wrong nor a crime.

To put the matter in perspective without any political inclination, the Bangkok Post asked stakeholders and independent experts to address relevant issues.

Sharing their views are MR Pridiyathorn Devakula, a former deputy prime minister; Nipon Poapongsakorn, a distinguished fellow at the Thailand Development Research Institute; Thirachai Phuvanatnaranubala, a former finance minister in the Yingluck government; Thai Rice Exporters Association honorary president Chookiat Ophaswongse; and Wichien Phuanglamjiak, president of the rice farmer group in tambon Khok Chang, Bang Sai district, Ayutthaya.

Is the rice-pledging scheme really a disaster?

MR Pridiyathorn: I once calculated financial damages incurred from the rice-pledging scheme for the first two years of the programmes -- the 2011-12 and the 2012-13 harvest years -- based on the pledging price, the actual operating costs and the rice volume sales disclosed by the Commerce Minister reaching 455 billion baht.

Based on my calculations, the Yingluck government spent 772 billion baht for pledging 27 million tonnes of milled rice, of which 633 billion was paid to rice farmers and the remaining 89 billion for operating costs in the two-year span.

The government then bought rice at an average cost of 28,600 baht per tonne but sold it at an average price of 11,700 baht per tonne based on the 12 million tonnes of rice produced in the 2011-12 harvest season sold by the Commerce Ministry, creating a loss of 201.6 million baht.

"The mammoth scale of the scheme made it difficult to supervise and control."

MR Pridiyathorn Devakula
Former deputy prime minister

However, the entire loss from pledging 27 million tonnes of milled rice is larger than 455 billion, as the selling price for the remaining 15 million tonnes was lower than 11,700 per tonnes, as delays in the selling process deteriorated the quality of the stored rice.

Mr Nipon: The rice purchase prices offered were about 50% higher than the market price -- every single grain and grade rendered an immense impact on the Thai rice market. The rice mills were hard hit, as only half of the millers or 700-800 of the total 1,400 were qualified to participate in the programme. The scheme also completely eviscerated rice brokers, as the majority of rice output was held by the government, while exporters could not afford rice, the price of which was relatively high under the programme.

The worst part of the scheme was that rice farmers were encouraged to grow short-lived rice varieties, with some growing rice three times a year in anticipation of pledging as much as possible with the programme. This resulted in higher production costs, as farmers needed to use more fertiliser, insecticide and rice varieties, while the farmland rental fee was doubled accordingly, from 500 baht per rai per year to 1,000 baht per crop year, and water usage was prodigious. With production costs considered, some farmers were barely profitable. The programme is considered a classic case of immense distortion.

Mr Chookiat: In principle, the rice-pledging scheme was supposed to reduce rice supply during the harvest season when the rice output swamps the market, suppressing paddy prices and lowering farm income.

In a bid to help shore up the rice prices and support farmers, the government generally proposes to buy a certain amount of the new harvest under the pledging programme and store the pledged amount in state stocks for the short term, until the harvest ends. The pledging price is normally based on global market prices at the time, with an expectation that farmers will later redeem their pledged rice in the market, when rice prices have bounced back. Each year, the pledging programme may be run either for the main crop or the second crop or both. The programme has been implemented by several governments in the past but has never offered pledging prices that were much heftier than market prices.

Mr Wichien: The rice-pledging scheme is not a disaster, as farmers nationwide all benefited from the scheme, sometimes selling paddy at as high as 12,000-13,000 baht per tonne.

"Rice pledging is not and will never be a financially sustainable way of helping farmers."

Nipon Poapongsakorn
Distinguished fellow,
Thailand Development Research Institute

What went wrong with Ms Yingluck's generous rice-pledging scheme?

Mr Nipon: As one of the attorney-general's witnesses, I cannot comment.

Please note that the charges against Mr Boonsong and Ms Yingluck were not that their rice pledging "policy" was wrong. The charge against Mr Boonsong alleges fake government-to-government (G2G) deals, while Ms Yingluck is accused of breach of statutory duty and nonfeasance.

Mr Thirachai: The price was set at high level in the hopes of pushing world market prices upwards. As it turned out, world competition was stiffer than we thought, and prices were not as high as we hoped for and not sustainable. With the benefit of hindsight, the scheme should have been assessed after the initial results, and when the intended results were not realised, it should have been stopped, amended or narrowed down to a smaller scale, especially after the warnings from various independent agencies.

Mr Chookiat: Yingluck's administration modified the traditional pledging programme to purchase rice directly from farmers, offering prices about 50% higher than the market price, with no limits on the amount pledged -- buying every single grain. Direct purchase was applied to both the main and second crops. This led to the rice fiasco, as farmers opted to sell to the state instead of the rice market. The new rice supply did not enter the normal market to be sold off, resulting in overall market disruption as rice traders could not afford rice to supply and deliver to foreign buyers. Pledged rice, meanwhile, was left in state warehouses instead of immediately being released into the market, and the grains deteriorated as time went on.

Mr Wichien: What went wrong with this programme was that rice was spoiled in state stocks and rice went missing from state warehouses. The blame should be placed on rice surveyors or the warehouses hired by the state to store the rice stock, not on former prime minister Yingluck.

"Farmers are forever in debt, with poor earnings and facing constant risk of losing their ancestral land."

Thirachai Phuvanatnaranubala
Former finance minister under
Yingluck Shinawatra

Have there been any negative effects since the scheme was enacted, such as damage to Thai rice trading and market forces?

Mr Nipon: The intervention in the rice market resulted in a huge fiscal loss of 607.2 billion baht as of Sept 30, 2016, according to a subcommittee overseeing the accounts of the scheme.

The loss increased public debt, which will be borne by taxpayers. In the medium term, financing the debt will crowd out public investment, thus affecting economic growth.

(a) The government intervention in the purchase of paddy and the sale of rice is highly susceptible to corruption because the rice sale was not conducted transparently, particularly the fake G2G charges against the politicians.

(b) During the implementation of the rice-pledging scheme, those who were participants of the scheme actively engaged in rent-seeking activities:

(i) Farmers excessively expanded rice production at higher production cost (and less profit). For instance, they used more irrigated water in 2012-13, which substantially reduced the stock of available water in the reservoirs in the following years (Thailand was affected by El Nino in 2015-16). Together with El Nino, the previous exorbitant use of water worsened the droughts in 2015-16.

(ii) Some millers aggressively expanded their milling capacity. Total milling capacity stands at 125 million tonnes of paddy, compared with annual production of only 27-30 million tonnes. Some traders also constructed new warehouses to rent to the government. Some millers have begun to experience financial difficulties as a result.

(c) Export losses of 2.81 million tonnes (or 43.4 billion baht) during the five cropping seasons (October 2011-May 2014) that the scheme ran for, compared with the preceding period of no intervention (October 2008-May 2011). Thailand also lost its reputation as a trusted and reliable rice exporter in the global market. It lost the Hong Kong market for hom mali and the high-value rice market in Iran.

(d) The scheme replaced the market mechanism with crony capitalism as the government undersold rice to a few politically connected traders. Most rice wholesalers, rice package suppliers and exporters were forced to purchase rice at higher prices from the complicitous traders.

"The scheme seriously distorted the market mechanism and contravened free-trade principles."

Chookiat Ophaswongse Honorary president,
Thai Rice Exporters Association

Mr Thirachai: The mammoth scale of the scheme made it difficult to supervise and control. Corruption at operational levels was difficult to contain. Farmers were induced to overproduce low-quality rice because of its shorter production time. And it was difficult to block smuggled rice from neighbouring countries.

It should be noted that the board of directors of the Bank for Agriculture and Agricultural Cooperatives (BAAC) and I, as the BAAC chairman, made many recommendations to help prevent corruption and fraud, such as the use of stock cards, surprise stock counts by external auditors and so on. The BAAC published these proposals in a green booklet that was submitted to both Ms Yingluck and Kittirat Na-Ranong, who took office as finance minister in late 2011.

Mr Chookiat: The scheme seriously distorted the market mechanism and contravened free-trade principles, under which players at all points of the supply chain levels are allowed to participate. The government intervened into the rice trading cycle, functioning as a giant rice trader that purchased rice at a relatively high price with no restrictions on the purchase amount. These actions critically altered the rice market, triggering tighter supply, as rice traders were not able to buy rice on their own terms. Traders who bought rice during that period were forced to pay higher prices, weakening Thai competitiveness in the global market, as indicated by a sharp fall in Thai rice exports during 2012-13.

Mr Wichien: The negative impact stemmed from unfair accusations from the military and the political opponents. From the farmers' perspectives, Ms Yingluck's scheme was highly successful.

What can be learnt from such an ambitious populist policy, rendered by a democratically elected government?

Mr Nipon: (a) Rice pledging is not and will never be a financially sustainable way of helping farmers. As a rice-exporting country, the only way to shore up the rice price for farmers is to subsidise farmers' domestic prices at lower than global prices. Simple economics tells us that when the rice price is artificially fixed above market equilibrium, most, if not all, farmers will expand production by increasing their inputs. Their production costs will increase, especially due to diminishing returns to scale. This will catalyse political pressure to increase rice prices again as farmers become restless as a result of their falling income. This will create a vicious cycle that will trigger a public debt crisis similar to what was seen in Greece and other Latin American countries.

(b) The Yingluck government believed that it could influence global rice prices by limiting rice supply, arguing that even though the pledging price was very high, it would not lose money. This is because if the government bought most of the rice from farmers (which it did -- buying 53-54 % of production over five seasons), and hoarded the supply in public warehouses, the constraint on supply would push up global prices. Hypothetically, it would have then sold rice at a higher price, thus making a profit, rather than a loss. In reality, the government stock resulted in lower prices because first, unlike the huge stock held by the Chinese government, which is mainly for domestic consumption, buyers knew that if they bought rice at a higher price today, they would lose money when the Thai government dumps more rice in the market. Such expectations brought down rice prices in the last two years.

"From the farmers’ perspectives, Ms Yingluck’s scheme was highly successful."

Wichien Phuanglamjiak President,
rice farmer group of Khok Chang,
Bang Sai district, Ayutthaya.

The belief that as the largest rice exporter Thailand can influence the global rice price by withholding supply is wrong. Global rice prices are subject to many complex factors, all of which the Thai government cannot control, particularly global weather, intervention policies of both importing and exporting countries, and the behaviour of farmers across the world, among others. In effect, price speculation is not the government's purview. The government must not engage in the buying and selling of rice and compete with the private sector, as intervention is not only highly inefficient but also corruption-prone.

(c) All elected governments have the right to campaign on populist policies. But governments must also be accountable to all voters, not just farmers. After being elected, the government has to propose a budget that includes public borrowing to the parliament. This is the democratic way. It should not use off-budget funds to finance such populist policies, as parliament cannot refuse to pay off the debts incurred.

(d) The government must prepare consolidated financial accounts of all transactions carried out by related agencies. Shamefully, the government passes laws forcing public companies to prepare consolidated accounts, something it does not practise itself. Nobody knows what the exact costs, losses and damages of the scheme will be after the rice is finally sold.

(e) One major problem of the policy is that most information about the rice-pledging scheme, particularly the exact volume of rice in government warehouses, government rice sales and G2G contracts, was withheld. There is a need for an open data policy.

Mr Thirachai: With the benefits of hindsight, future pledging should not be allowed above prevailing market levels. There should be legislation to prevent all future governments from taking ownership of agricultural products, because of the corruption risks at operational levels.

Mr Chookiat: The rice-pledging programme implemented by the Yingluck government did not only require a colossal budget over three years (late 2011-early 2014), but it also brought about a spate of irregularities and corrupt practices seen in the abuse of public power for personal benefit during the pledging procedures and in fake G2G rice purchase contracts. The scheme also tarnished Thailand's image in the rice market, as the quality of the grains that were warehoused for a long time deteriorated, leading foreign buyers to lose confidence in Thai rice and choose to buy from other rice-exporting countries. Even with the absence of the state-sponsored pledging scheme, some foreign buyers baulked at buying Thai rice, citing bad experiences from certain unscrupulous exporters who delivered sub-standard grains during the pledging period.

Mr Wichien: Despite the negative perception of the generous populist policy, the scheme still benefits all farmers.

Has rice trading returned to a normal market environment, and can the rice market survive in the absence of state support like the rice-pledging programme?

Mr Nipon: Thailand has managed to compete head-to-head with India for the position of largest world rice exporter over the last two years since the abolition of the rice-pledging scheme.

It has also slowly regained a reputation as one of the most reliable rice exporters in Hong Kong. That is, Thai exporters are able to sell any type of rice and can ship and deliver rice to any designated destinations on time. But it still has to work harder to win back market share in Iran.

Having said that, one should be warned that there is also bad news. The cost of rice production in Thailand is higher than in competing countries. Thai exporters can survive partly because of efficient logistics and partly because they have to provide trade credit to buyers. This puts the Thai rice exporters in a very risky position.

Mr Thirachai: In the absence of government intervention, the market automatically normalises. However, the plight of poor farmers remains. Farmers are forever in debt, with poor earnings and facing constant risk of losing their ancestral land.

Mr Chookiat: During 2014-16, despite the absence of the rice-pledging programme, the Thai government still maintained massive rice stocks of as many as 18 million tonnes accumulated from the pledging scheme. Colossal state rice stocks in Thailand also put negative pressure on global rice prices. After the incumbent government disposed of almost all state-held rice stocks, the global rice market has rebounded to more normal conditions, leading Thailand's rice trade to align with the market mechanism and boast greater competitiveness, as is clearly evidenced by Thailand's higher rice exports averaging 10 million tonnes per year over the past few years.

Mr Wichien: The rice trading market has returned to normal conditions, but farmers still face high production costs in harvest fees, or transport, among others. Farmers now fetch only 4,000-6,000 baht per tonne for paddy with a moisture level of 15%.

Are state subsidies for Thai rice or any other cash crop appropriate?

Mr Nipon: As long as rice is a political good, there will always be state subsidy. That's the fact of life. The appropriate subsidy policy should be based on the following criteria:

(a) A subsidy that minimally distorts market prices (consistent with the World Trade Organization).

(b) Targets the neediest farmers.

(c) Enhances productivity and reduces production cost. Subsidies that meet criteria (a) and (b) include the fixed-income payment per rai, which is calculated from the previous record of rice yields. The subsidy is paid only to farmers who have at most, say, 15 rai. But there will be political pressure to provide subsidy to all farmers. In that case, every farmer should be entitled to a fixed amount of subsidy per rai for not more than 5-10 rai per household. That will limit the budget deficit and enable the government to pursue prudent fiscal policy.

The second policy is to subsidise research, adoption of new technology and agricultural extensions services (by the private sector and civil society organisations). Such subsidies have to be subject to performance-based evaluations. The outcome will be higher productivity and sustainable income for farmers.

Mr Thirachai: The approach to government assistance at the back end, based on intervention in agricultural products, needs to change. There have been many such schemes in the past by various governments -- pledging, purchases and direct subsidies to farmers, but none had long-lasting benefits.

Instead, government assistance should be at the front and middle end, aiming to lower farmers' costs by really following the King's Sufficiency Economy theory, such as:

(a) Tax and land reforms to force redistribution of land out of the hands of big land owners. The target must go well beyond simply penalising vacant and unused land. A comprehensive tax change must aggregate the land area of each individual's ownership, regardless of whether land is vacant or utilised, whether the land is in the individual's own name or in corporate names, and be calculated from effective shareholdings. The larger the aggregate held area is calculated and attributable to a single person, the higher the tax rates should be.

(b) Government support to acquire community land titles to ensure farmers have joint ownership of land for use.

(c) Government support for each community to invest in specific physical facilities that will strengthen farm life. Each community will have individual needs ranging from irrigation equipment, water storage, sheds to mix and store organic fertilisers, sheds to mix and store animal feeds, packaging for community products, small community rice mills, modern rice silos that can dry and store unmilled rice for longer periods, garbage sorting and management, and so on. Each community will have different priorities for these things.

(d) Government support for each community to learn to be sustainable, by engaging local universities and vocational colleges to teach communities how to sustainably manage these new physical facilities. All communities should have learning centres to monitor weather risks, price risks, disease risks, crop improvement techniques, new equipment and so on.

(e) Government help to teach each community how to self-govern. Communities can then set their own production zoning, police their own waterways, water usage, water discharge and garbage disposals.

(f) Customised assistance to improve and strengthen community lifestyles, increase self-management and eventually lower community costs will take more time, more effort and more coordination from various parties than simple intervention in agricultural products. Multi-year programmes with continuous government budgets. However, the benefits will be sustainable and be directed at the community level rather than through the hands of politicians. More ice cream will reach the grassroots than just remains on a wooden stick as before.

Unfortunately, as such multi-year programmes do not yield quick fixes and inevitably target rich individuals' vast land holdings, which include politicians', these changes may not be palatable to political parties and may remain a dream.

Mr Chookiat: Assistance to farmers remains essential, now that the government is held responsible for taking care of the farmers. But state assistance or any forms of subsidies should be focused rather on helping cut production costs and procuring production-related factors such as plant seeds, fertiliser, agricultural machinery, production know-how and technological development to increase rice productivity and promote non-farm income. The government should no longer apply any policies that distort the market mechanism, because this not only undermines the market mechanism but also affects Thailand's rice farming in the long run.

Mr Wichien: The state price intervention scheme is still necessary, as long as there are traders who buy farmers' produce at low prices. The government is being urged to help make fair purchase prices to farmers by taking into account the farmers' production costs. The paddy prices that enable farmers to stay afloat should not be below 10,000 baht a tonne.

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